Regional Banks May Benefit From Equity Plan

Reports have said that large banks including Goldman Sachs (GS Quote), Morgan Stanley (MS Quote), JPMorgan Chase, Citi, BofA (including recent acquisition Merrill Lynch (MER Quote)), Wells Fargo, Bank of New York Mellon (BK Quote) and State Street (STT Quote) are among the first recipients of government equity investments.

The same institutions also have agreed to a plan in which the Federal Deposit Insurance Corp. will temporarily guarantee the senior debt of all federally insured institutions and their holding companies, as well as deposits in non-interest bearing deposit transaction accounts in exchange for a greater supervision.

Under the Treasury's plan, announced early Monday, a qualifying financial institution may issue senior preferred equity that equals the lesser of 1% of its risk-weighted assets or $25 billion up to 3% of risk-weighted assets.

While regional banks were not included in the initial agreement, analysts say it won't be long before smaller banks take part in the equity infusion.

The government is "very cognizant that small banks want to participate," says Morgan Keegan senior bank analyst Robert Patten. "There is no doubt in my mind that the government is probably starting at the top and will work its way down. You need to make sure the largest banks are liquid."

Patten also upgraded several regional banks expected to benefit from the capital plan and FDIC initiative, including Fifth Third, SunTrust (STI Quote), Marshall & Ilsley, Synovus (SNV Quote) and Zions.

But Patten points out that there are limits to the use of capital.

Banks that participate in the initiative will need the approval of the Treasury to increase the dividend on its common stock. Among other details, banks will also need approval to buy back stock and will be required to scale back their executive compensation packages, according to terms of the deal.